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Carney: Eurozone is caught in a ‘debt trap’

by: Alice Rigby
  • 29/01/2015
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Carney: Eurozone is caught in a ‘debt trap’
Bank of England Governor Mark Carney has warned the eurozone could sink further into its 'debt trap' as austerity measures choke off growth.

Speaking in Dublin, Carney (pictured) criticised eurozone countries’ efforts to stimulate growth, saying some member states are still falling further behind their peers.

Since the financial crisis, all major advanced economies have been in a debt trap where low growth deepens the burden of debt, prompting the private sector to cut spending further,” he said.

“As difficult as it has been, some countries, including the US and the UK, are now escaping this trap. Others in the euro area are sinking deeper.”

Carney was also critical of the single currency area’s austerity measures, suggesting there needs to be more fiscal harmony among members.

Austerity has come under increasing scrutiny in Europe after the Greek anti-austerity party Syriza swept the country’s elections

Carney added: “It is difficult to avoid the conclusion that, if the eurozone were a country, fiscal policy would be substantially more supportive. Europe still lacks other effective risk-sharing mechanisms and is relatively inflexible.”

One of the key criticisms of eurozone member states, notably from the ECB, has been a perceived reluctancy on the part of individual governments to substantially reform their economies.

The eurozone fell into deflation in December 2014 and Carney said this could be dangerous for the region.

He said: “This is potentially dangerous. Low nominal growth is intensifying the euro area’s debt burden. The fear of stagnation is holding back spending and investment.”

However, Carney added it is still possible for increased economic cohesion to rescue the eurozone.

“Europe needs a comprehensive, coherent plan to anchor expectations, build confidence, and escape its debt trap.”

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